A Framework for Human Resource Management, 5th ed.

Gary Dessler

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Compensating Employees
Ch 7

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When you finish studying this chapter, you should be able to:

Explain each of the five basic steps in establishing pay rates. Discuss four basic factors determining pay rates. Compare and contrast piecework and team or group incentive plans. List and describe each of the basic benefits most employers might be expected to offer.
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Introduction
Employee compensation
- refers to all forms of pay or rewards going to employees and arising from their employment - direct financial payments - indirect payments

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Employee Compensation
Direct financial payments
- payments in the form of wages, salaries, incentives, commissions, and bonuses

Indirect payments
- payments in the form of financial benefits like employer-paid insurance and vacations

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Pay Factors
1. 2. 3. 4. Legal Union Policy Equity

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Some Important Compensation Laws

Fair Labor Standards Act
- contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions covering the majority of U.S. workers

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Some Important Compensation Laws (cont.)

Equal Pay Act
- employees of one sex may not be paid wages at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work

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Some Important Compensation Laws (cont.)

Title VII of the Civil Rights Act
- makes it an unlawful practice for an employer to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin

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Some Important Compensation Laws (cont.) Age Discrimination in Employment Act Americans with Disabilities Act Family and Medical Leave Act

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How Unions Influence Compensation Decisions

National Labor Relations Act (NLRA) of 1935
- granted employees the right to organize and to bargain collectively

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Compensation Policies
A hospital might have a policy of starting nurses at a wage at least 20% above the prevailing market wage. The average base pay for an executive secretary ranges from $37,300 in Albuquerque New Mexico to $41,900 (Tampa, Florida), $59,800 (New York, New York), and $60,100 (San Francisco, California).
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Equity and Its Impact on Pay Rates

External equity
- pay must compare favorably with rates in other companies, or an employer will find it hard to attract and retain qualified employees

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Equity and Its Impact on Pay Rates (cont.)

Internal equity
- each employee should view his or her pay as equitable given other employees pay in the organization

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How Employers Establish Pay Rates

1. Conduct a salary survey 2. Employee committee determines the worth of each job 3. Group similar jobs into pay grades 4. Price each pay grade by using wage curves 5. Develop rate ranges

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Step 1: Conduct the Salary Survey

Salary (or compensation) surveys
- formal or informal surveys of what other employers are paying for similar jobs

Used to price benchmark jobs Collect data on benefits

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Step 2: Determine the Worth of Each Job

Job evaluation
- formal and systematic comparison of jobs to determine the worth of one job relative to another

Compensable factors
- factors that determine your definition of job content, establish how the jobs compare to each other, and set the compensation paid for each job

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Job Evaluation Methods

Ranking method
- ranks each job relative to all other jobs

Job classification
- manager categorizes jobs into groups based on their similarity in terms of compensable factors such as skills and responsibility

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Ranking Method of Job Evaluation

1. 2. 3. 4. 5. Obtain job information Select raters and jobs to be rated Select compensable factors Rank jobs Combine ratings

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Job Evaluation Methods

Point method
- involves identifying several compensable factors, each having several degrees, and then assigning points based on the number of degrees, to come up with an actual number of points for each job

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Step 3: Group Similar Jobs into Pay Grades

Pay grade
- comprises jobs of approximately equal difficulty or importance as determined by job evaluation

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Step 4: Price Each Pay GradeWage Curves

Wage curve
- shows the average pay rates currently being paid for jobs in each pay grade Purpose of a wage curve is to show the relationship between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for the grades
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Plotting a Wage Curve

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Step 5: Develop Rate Ranges

May be 10 levels or steps and 10 corresponding pay rates within each pay grade Employer may fine-tune pay rates to account for any unique circumstances

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Pricing Managerial and Professional Jobs

Emphasize nonquantifiable factors such as judgment and problem solving Tendency is to pay managers and professionals based on their performance

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Executive Compensation Variance

Three main factors Job complexity Ability to pay Human capital

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Pricing Managerial and Professional Jobs

Four main components: Base salary Short-term incentives Long-term incentives Executive benefits and perks

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Strategy and Executive Pay

Identify the company's strategic direction, and translate this into specific business goals List the skills and competencies your professional employees should have to accomplish these goals

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Strategy and Executive Pay (cont.)

Evaluate the extent to which the existing pay plan produces these skills and competencies Design and implement the new pay plan

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Current Trends in Compensation

CompetencySkill-based pay
- employee is paid for the range, depth, and types of skills and knowledge he is capable of using rather than for the responsibilities of the job currently held

Competencies
- demonstrable personal characteristics such as knowledge, skills, and behaviors

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Current Trends in Compensation (cont.)

Skill-based pay programs
- employer defines specific skills, and has a method for determining the persons pay based on his or her skill competencies

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Current Trends in Compensation (cont.)

Broadbanding
- collapsing salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels

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Board Oversight of Executive Pay

Has our compensation committee thoroughly identified its duties and processes? Is our compensation committee being appropriately advised? Are there particular executive compensation issues that our committee should address? Do our procedures demonstrate diligence and independence? Is our committee appropriately communicating its decisions?
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Incentive Plans
Individual incentive programs
- give performance-based pay to individual employees who meet their individual performance standards

Variable pay
- refers to group pay plans that tie payments to productivity

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Piecework Plans
Piecework
- pay is tied directly to what the worker produces - paid a piece rate for each unit he or she produces

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Team or Group Incentive Plans

Companies often want to pay groups on an incentive basis, such as when they want to encourage teamwork

Main disadvantage is that each workers rewards are not based just on his own efforts

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Incentives for Managers and Executives

Stock option
- the right to purchase a specific number of shares of company stock at a specific price during a period of time

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Incentives for Salespeople

Most companies pay their salespeople a combination of salary and commissions Typically a 70% base salary/30% incentive mix

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Auto-dealers Compensation
Compensation for car salespeople ranges from a high of 100% commission to a small base salary with commission Commission is generally based on the net profit on the car It encourages the salesperson to hold firm on the retail price, and to push after-sale products

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Non-Tangible and Recognized-Based Awards

Studies show that recognition has a positive impact on performance, either alone or in conjunction with financial rewards

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Online Award Programs

Recognition programs are expensive to administer Firms partner with online incentive firms to expedite process

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Incentive Plans
Merit pay
- any salary increase awarded to an employee based on his or her individual performance

Profit-sharing plan
- most employees receive a share of the companys annual profits

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Incentive Plans
Employee stock ownership plan (ESOP)
- a corporation contributes shares of its own stockor cash to be used to purchase such stockto a trust established to purchase shares of the firms stock for employees

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Broad-based Stock Options

With companies now having to show stock options as an expense when awarded, some firms feel awarding stock instead of stock options is a more direct and immediate way of linking pay to performance

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Incentive Plans
Gainsharing plans
- want to encourage improved employee productivity by sharing resulting financial gains with employees

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Scanlon Plan
1. 2. 3. 4. 5. Philosophy of cooperation Identity Competence Involvement system Sharing of benefits formula

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Earnings-at-Risk Pay Plans

Earnings-at-risk pay plans
- some portion of the employee's base salary is at risk

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HRIS and Productivity

Enterprise Incentive Management (EIM) software is used to automate the planning and management of incentive plans

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Employee Benefits
Benefits
- defined as all the indirect monetary and nonmonetary payments an employee receives for continuing to work for the company

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Pay for Time Not Worked

Supplemental pay benefits
- typically one of an employers most expensive benefits - holidays, vacations, sick leave, and jury duty

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Pay for Time Not Worked (cont.)

Severance pay
- a one-time separation payment

Worker Adjustment and Retraining Act of 1989

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Insurance Benefits
Workers compensation
- aimed at providing sure, prompt income and medical benefits to work-related accident victims or their dependents

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The Pregnancy Discrimination Act

Pregnancy Discrimination Act
- requires employers to treat women affected by pregnancy, childbirth, or related medical conditions the same as any employee not able to work, with respect to all benefits, including sick leave and disability benefits, and health and medical insurance

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Insurance Benefits
COBRA Comprehensive Omnibus Budget Reconciliation Act
- requires most employers to make available to terminated employees continued health benefits for a period of time

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Cost Control
Cost containment specialists Online administration Defined benefits Deductibles Outsourcing Wellness programs Claims audits Medical tourism Long-term care
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Retirement Benefits
Social Security Retirement benefits Death benefits Disability payments

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Pension Plans
Defined benefit pension plan
- contains a formula for determining retirement benefits so that the actual benefits to be received are defined ahead of time

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Pension Plans
Defined contribution plan
- specifies what contribution the employer will make to a retirement or savings fund set up for the employee

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Employee Service Benefits

Employee Assistance Programs (EAPs)
- formal employer program for providing employees with counseling and advisory services

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Employee Services and Family-Friendly Benefits

Flexible benefits plans
- initially called cafeteria plans because employees could spend their benefits allowances on a choice of benefits options

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Employee Leasing
Employee leasing
- leasing firm becomes the legal employer and handles all employee-related paperwork

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Strategy and HR
Employers today want to ensure that their compensation plans (1) add value in terms of (2) promoting the employee performance that is required for (3) achieving the firms strategic goals.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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